Industrial Clustering, Urban Politics And Regional Development_prihadi Nugroho

Industrial Clustering, Urban Politics and Regional Development: Are We Going to Better Regional Policy or Muddling Through? By: Prihadi Nugroho

Background • The inception of industrial clustering policy by Indonesian Government at both national and local levels has reached growing recognition in recent developments • The policy rationale is associated with: – The internal capacity of (mostly) small and medium industries clusters to face difficult times with less government support – The benefits of clustering in generating economic growth through local resources utilisation, new employment creation, flexible specialisation, collective efficiency, and so forth – Its usefulness to the strengthening of industrial linkages and the creation of transition economy to peasant society

Background (contd) • However, the policy practicalities remain problematic because of its failure to reduce institutional obstacles resulting from distortive policies – Recent policies have excessively focused on internal capacity upgrading with less attention to clusters’ special needs – Sustaining government privileges on the development of urban manufacturing industries and large scale industries

• The study purpose is to examine the emergence of urban politics in the making of industrial clustering policy

When Clustering Begins? Import substitution

Export promotion

(Protection)

(Liberalisation)

BIPIK Program in mid 1970s

The 1997 Asian Crisis’ effects to economic development

Porter’s Diamond Model

The rebuilding of nation’s competitive advantage

Selective protection with liberalisation?

The search for strengthening industrial structure

Internal Capacity Building The support in microcredit, production, promotion, marketing, business management, etc.

The Principles of Clustering • Inter-firm linkages of particular products involving core and supporting activities • Naturally exists in certain location • (Generally) consisting of proximate interrelated firms • Generated by trust relationships and social networks rather than economic interests • Combining competitive and collaborative relations • Flexible specialisation and collective efficiency instead of individual profit-maximising processes

Big Question?

Does the government really intend to promote industrial clustering approach?

The Facts • The stronger industrial linkages have not existed yet – Clustering is unable to link the existing large manufacturing industries with small-medium industries – eg. LNG plants vs. fertiliser factories vs. agroindustries

• Coercive government initiatives to link these sectors cannot last and increase resistance within industries – Inter-firm parenting approaches from large manufacturing industries and state-owned enterprises only help temporarily – eg. Program Bapak Angkat, Kemitraan Inti-Plasma, etc.

The Facts (contd) • Resources-based capacity declines, dependency on imported raw materials increases – Domestic producers are facing more scarcity of raw materials – eg. furniture industries “forced” to buy ex-smuggling woods

• Clustering policy too much focuses on internal capacity building, but fails to recognise the problems of structural relations between industries – The prevailing subcontracting patterns and socially economic ties between larger and smaller firms inside clusters have made smaller firms had less opportunities to grow independently

The Facts (contd) • The promotion of distortive policies that inhibits small and medium industries to improve their capacity – eg. non-subsidised petroleum for export industries, conventional practice banking conditionality to limit female business owners to access microfinance, etc.

• The greater attention to urban manufacturing industries than small and medium industries and agriculture sectors – The recent development policies have consistently supported pro-growth regime that allows domestic market more opened to imported products, creating ambivalent protection to domestic industries

The Facts (contd) • Coordination issues between related government agencies remain unsolved – Cluster development and small and medium industries have become policy agenda of various government agencies at both national and local levels

• The adoption of clustering policy in local developments only reflects the interests of central government agencies – eg. the extended use of clustering policy in agropolitan development policy by Ministry of Agriculture and Ministry of Public Works

Examining Policy Support FOCUS • The lack of internal capacity of small and medium industries • The government maintains the control over policy process

RELEVANCE • The clustering policy only seeks for total output increase • Small and medium industries still subordinated in the policy

COHERENCE • Clustering policy less essential than other economic policies • The policy contradictions and ambivalence over time

RELIABILITY • Policy ideals and practicalities do not fit each other • Policy suitability to overcome local and global challenges

The Exercise of Urban Politics URBAN ELITES

CORPORATE INTERESTS

Government officials

Urban manufacturing industries

Political shareholders

Small and medium industries

Industrial Clustering Policy

Agriculture-based and traditional sectors Tensions between larger and smaller firms and between urban and rural sectors

The Exercise of Urban Politics (contd) • An unequal treatment in providing required facilities and infrastructures between urban manufacturing industries and small and medium industries – Urban growth vs. endogenous development

• Many policies are more favouring large industries and disregard the special needs of small and medium industries – The friendly business environment is questioned

• The limited capacity of local governments to create proper clustering policy with respect to localities – Local development policy reflects central government interests

Conclusion • The effects of urban politics to some extent have distorted the achievement of industrial clustering policy goals – Increasing greater value added with less inter-firm linkages?

• The existing industrial clustering policy has ignored the importance of the enhancement of reciprocal trusts and social networks between industries – Too much focus on short-term economic benefits?

• The government has put forward policy pragmatism instead of policy comprehensiveness – Clustering emerges in natural setting and evolves over time

Thank you for your attention